Leeham News and Analysis

Boeing’s 3Q strong; initial analyst takes; transcript link

Boeing announced strong results for 3Q2012. The press release may be found here.The transcript from the earnings call is here.

The initial analyst take is below. Note the pension comments in JP Morgan; this helps explain why Boeing wants to shift new hires to a 401(k) program from a Defined Pension Plan.

Bernstein Research

Boeing reported a very strong Q3, particularly related to its outlook for the year. For the year, the company has raised guidance for defense revenues, defense margins, and operating cash flow. We see cash generation as a particularly important area of focus for Boeing. Although Boeing Commercial Airplanes guidance was unchanged, we will be looking for more insight on progress on the 787 during the earnings call – we see the 787 as central to the long term performance story. High margins in defense are consistent with our view of strong margins across the defense sector as companies (including Boeing) focus on cost reduction.

Boeing reported Q3:2012 EPS of $1.35, above consensus of $1.13 and our expectations of $1.03. Boeing attributed the EPS beat to “strong core operating performance”. Boeing raised 2012 EPS guidance by $0.35-$0.40; to $4.80-4.95, up from $4.40-$4.60. The size of the EPS guidance increase is encouraging because it suggests even better performance in Q4.

Sales for the quarter were $20.0bn, in line with consensus of $20.0bn and our expectations of $20.1bn. Boeing raised sales guidance for the year up $500M-$1bn, to $80.5-$82bn from $79.5-$81.5bn on expectations of higher Boeing defense sales.

Goldman Sachs

Boeing reported 3Q12 EPS ahead of its consensus, raised its 2012 EPS guidance to a range above consensus, and generated strong orders and cash flow in the quarter.

3Q12 reported EPS of $1.35 compares to consensus of $1.12 and GS at $1.15. The tax rate was 550 bps below our estimate, which added roughly $0.10. Boeing’s reported segment operating profit is 8% above our estimate which was above consensus.

Total revenue of $20.0bn was 1% below our $20.2bn estimate, as Boeing Commercial grew 28% and Boeing Defense declined 4%. But total EBIT margin of 7.8% was 70 bps ahead, with Commercial 20 bps better and Defense 150 bps better.

Free cash flow in the quarter was $1.18bn, implying FCF/NI of 1.14X. It is up from $564mn qop and $104mn yoy.

Total company backlog increased sequentially to $377.6bn from $373.8bn. BCA book-to-bill was 1.41X, while BDS was 0.76X.

Boeing raised its full-year 2012 EPS guidance to $4.80-4.95 (ahead of consensus of $4.72) from $4.40-4.60. Even when adding the $0.10 tax benefit in the quarter to consensus, the mid-point of the new range is still above the Street’s prior expectations. Boeing raised its revenue guidance to $80.5-82.0bn from $79.5-81.5bn. It reiterated its BCA margin guidance, but raised its BDS margin guidance by 25 bps. Operating cash flow guidance was raised to >$5.5bn from >$5.0bn. The 2012 787 + 747-8 unit forecast of 70-85 was reiterated.

JP Morgan

Boeing put up a solid quarter with a big headline beat and higher guidance, but the pension expense outlook is even worse than we had expected. Defense margin drove the operational beat and a lower than expected tax rate contributed as well. Boeing delivered the preliminary 2012 pension guidance we had expected, and it is a whopper. Pension expense is expected to be up by $1 bn, about half of which is driven by previously inventoried expense. We had anticipated that the inventoried pension could provide incremental headwind, but not by nearly this much. The difference between this and our current 2013 estimate could be worth another 55 cents of EPS. We anticipate that management will offset some of this with some combination of share buybacks and pension contributions, but we believe that full capital deployment plans will not be discussed until at least December; so, GAAP EPS estimates for 2013 are likely to drop in the coming days.

EPS of $1.35 exceeded our estimate by 24 cents and consensus by 23 cents Relative to our estimate, EBIT accounted for 14 cents of upside, with defense margins comprising nearly all of it. Tax contributed another 9 cents. Management raised 2012 EPS guidance from $4.40-4.60 to $4.80-4.95

BCA EBIT of $1,153 mn was 4% ahead of our estimate on margin strength. We estimate the core operating margin (ex R&D and the low margin 787 and 747-8 programs) was 17.3%, in line with our 17.2% estimate. We had had some concern that a 737 block extension during the quarter could provide some pressure, but this did not materialize. R&D was also modestly lower than expected, contributing to the overall 30 bps margin beat. BCA margin guidance remained ~9.0% despite the 9.9% YTD level. Q4 period costs could provide some headwind, but we believe there is plenty of conservatism in this guidance.

UBS

Q3 at $1.35 included $0.10 from lower tax rate: Q3 EPS at $1.35 including $0.10 benefit from lower 29% tax rate. Upside relative to our model came from BDSS (Defense) as BCAG (Commercial Airplanes) came through overall in line with our expectations. BCA margins at 9.5% with pre R&D at 13.8% diluted by higher 747-8/787 deliveries. We estimate pre R&D margins ex 747-8/787 at 17%, in line with Q2. BDSS revenues down 4% vs our -8% while 10.5% margins were 100bps better than our model. FCF at $1.2B or 113% of net income dragged down on $1.8B inventory build and $750M pension contribution.

787 cash costs improved by ~$15M per unit: 787 deferred production grew by $1.1B, slightly below prior quarter on similar production. While we need further details for precise calculation, we estimate deferred production per unit improved by $15M relative to Q2. BCAG reported a $1B unit accounting loss reflective of 747-8 and 787 losses, much higher than $144M in Q2 on seven additional 747-8 and 787 deliveries.